The Illusion of Economic Growth

Trump celebrated the release of the GDP numbers Friday morning praising the 4.1 percent economic growth in the second quarter. The President called the numbers “amazing” and “very, very sustainable – this isn’t a one-time shot.” [1] While it is understandable that any President wants to tout a strong economy, this hyperbole is rather close to a fib.

To further exacerbate the situation, enter Donald Trump Jr. who demonstrated his inability to research. Looking past the vanity of his tweet, the claim that “Obama never broke 2%” GDP, even if he was being facetious, was a true face-palm moment. It is clearly seen in the chart below that Obama broke the 2 percent threshold a multitude of times.

Incredible numbers. I remember when “the experts” laughed about breaking 3%. Just because Obama never broke 2% doesn’t mean that someone with great policies can’t. Let’s keep this going. https://t.co/05LyLBw22j

First of all, to give credit, a 4.1 percent GDP growth is the highest percent change from a preceding quarter since the third quarter of 2014, as can be seen below. However, when looking into what comprises the GDP and its growth, one will find that it is a bit ‘flawed’ and not sustainable – at least from the improvements to the current catalysts.

The question that comes to mind is: if the US experienced just a little over 2 percent growth in Q1, how did it double in just one quarter? The tax cuts have fueled more stock buybacks, consumers are spending just as much as they were in previous quarters, and US production of goods has more or less flat-lined – so what changed? The answer? Tariffs.

Not only are tariffs ‘unsustainable’ in the long term, they are essentially a tax on the US citizens who buy goods other than American…but it’s not like the US produces the goods in which it imports. As a reference, just about everything in a Wal-Mart used to be all American made goods, now one would be lucky to find something made in America that is not in the hunting section. [2]

To explain this jump in growth in the GDP one can look to the exports. Net exports contributed 1.06 percent to the pace of growth in GDP (the most since 2013). This increase in exports was from businesses trying to export their goods, i.e. soybeans, before the tariffs are actually in place. This comes from the Commerce Department who said inventories dipped 1 percent (the most since 2014) attributing the dip to “soybean stocks as well as those of drugs and sundries and petroleum and related products.” [3]

Many economists believe this second quarter of substantial growth is simply just a one-off. Not only was the GDP “tricked” by the mad-shipping-rush to squeak by the tariffs, but the GDP is simply not the correct tool to gauge economic stability. One measure that is looked to is the ‘final sales to private domestic purchasers’ which exclude trade, inventories, and government overlays. More or less, it demonstrates the relationship between businesses and consumers without all of the cloudiness. But to be fair, that metric also grew at 4.3 percent – the second-fastest since 2014. [3]

So who knows? Maybe the economy is alive and kicking. Yet, there are a few areas which have not been talked about.

Dying Housing Market

For one, the slowing housing market. The U.S. new home sales fell to an eight-month low in June. Furthermore, the previous month of May’s data was revised to a much lower number. According to the Commerce Department, “new home sales decreased 5.3 percent to a seasonally adjusted annual rate of 631,000 units last month, the lowest since October 2017. May’s sales pace was revised down to 666,000 units from the previously reported 689,000.” [4]

The new-home housing market has been hit with rising building material costs – likely due to tariffs – and shortages of land and labor which increases the costs of new homes. These elevated prices along with rising interest rates deter buyers – and especially first-time buyers – from purchasing homes.

Existing housing sales have also been down due to their inflated prices throughout the country. In looking at California, one of the largest housing markets in the nation and often a predictor for the rest of the country has slowly and silently been crashing. According to CoreLogic, sales of both new and existing homes and condos have dropped 11.8 percent year-over-year all while prices are at record highs. “The median price paid for all Southern California homes sold in June was a record $536,250, according to CoreLogic, a 7.3 percent increase compared to June of 2017”. [5]

Deficit Continues To Grow

Despite Trump’s rhetoric in reducing the trade deficit regarding trade deals and tariffs the U.S. deficit continues to grow. Trump first instituted tariffs on steel and aluminum followed by a 25 percent tariff on $50 billion worth of goods. He further added fuel to the fire by ordering officials to identify another $200 billion in Chinese imports to receive additional tariffs of 10 percent with another $200 billion after that if China retaliates. [6] While Trump indicates that these measures will reduce the trade deficit, there has been little to show for it.

The U.S. deficit has grown $8 billion in the first quarter of 2018 to $124 billion or 2.5 percent of GDP. While the $8 billion may seem small when looking at the trade deficit as a whole, one can see that “in the first quarter of this year, the trade deficit grew by 15 percent compared with the same period last year, rising from $79 billion to $91 billion.” [7][8]

The only ‘positive’ which has been seen related to the tariffs, as indicated by the Bureau of Economic Affairs in a released statement, is that many U.S. multinational enterprises are bringing back home money parked in offshore accounts – which have been out of the U.S. for many years. Yet, whether that money is being used for further investment or simply being passed on to shareholders remains to be seen. [9]

Conclusion

So while the U.S. has experienced one-quarter of inflated GDP growth, other sectors of the economy are taking a dip. The culmination of increasing interest rates, added tariffs, and already inflated stock and housing markets have put pressure on the economic landscape – something will have to give.

What is frustrating about the whole situation is that as a whole, the economy has not changed that much between Obama and Trump. When candidate Trump was on the campaign trail he pointed and attacked officials regarding the economy. He blamed Obama, Wall Street, the Federal Reserve, and others as the cause for the stagnation in the growth and productivity of the United States. Yet, without much change and sluggish statistics with the exception of a few outliers (one-quarter of explosive GDP growth and lowering unemployment), Trump touts the economy is the greatest ever – also hyperbole.

Americans still experience low wage growth and now a taxation in the form of tariffs on the goods they buy. Why Trump is still not critical of the same things he was when he was campaigning is quite troubling. It is as if he tried to fight the system and then became one with the system – or he lied to the American people on the campaign trail by saying what was wanted to be heard. He is touting the same talking points he criticized during his campaign. [10] That strategy landed him the presidency and if he keeps it up, it is likely the Democrats will harness the same rhetoric in their platform for 2018 and 2020; this time blaming Republicans, tariffs, and trickle-down tax-cuts.

The Keynesian economic mindset is ruining the American economic engine.

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Jaise Donovan

Jaise is a conservative-libertarian who believes the sovereignty of the nation lies with "we the people" and not the government. He writes to inform others of the actions of government (or the people in it), to analyze possible outcomes of such actions, and bring to light important issues of the day. He tries to convey his thought process of how it can effect lives on a daily basis both politically and economically – for better or for worse.